What, If Anything, Should Replace the QM GSE Patch?

Abstract

In 2017, approximately 400,000 high debt-to-income mortgages met the definition of the Bureau of Consumer Finance Protection’s Qualified Mortgage rule thanks to an exemption that grants QM status to high-DTI loans guaranteed by Fannie Mae or Freddie Mac. This exemption, referred to as the “GSE patch” is set to expire on January 10, 2021, or when the GSEs exit conservatorship, whichever comes first. This sets up an urgent need to determine what, if anything should replace the patch. This article offers three options to that end: 1) preserve the patch; 2) make QM determination based on overall riskiness, as measured by spread to a mortgage lending benchmark rate; or 3) drop the patch. The authors examine each option and recommend Option 2 because it strikes a healthier balance between expanding access to credit and limiting defaults to reasonable levels. Option 2 would eliminate both the DTI cap and the GSE patch while placing the private sector on a more equal footing with the GSEs.

TOPICS: Legal and regulatory issues for structured finance, legal/regulatory/public policy